On the Verge of Tax Reform

June 8, 2009 5:38 pm

There are dozens of small reasons to oppose a tax reform package passed last week by the Legislature. There are two big reasons it is needed: Maine must lower its tax burden and it must have a tax system that is less volatile. LD 1088 does both.

The authors of LD 1088 did the difficult work of devising a system that will lower the state’s income tax rate — which will help the thousands of businesses that file individual tax returns — without leaving a gaping hole in the state budget. It did so by extending the state’s sales tax to services and items not currently covered and by increasing the meals and lodging tax. This, of course, creates many opportunities for industries and their lobbyists to criticize the changes. That is what killed a similar tax reform measure two years ago and threatens to derail this work.

Maine can’t afford that outcome. So, any changes to the bill must not upset its delicate balance.

For Peter Mills, the only Republican to vote for the measure in the Senate, it is all about capital. Businesses don’t locate and invest in Maine because the 8.5 percent income tax rate means less return on their investment than in states with lower tax rates, he said. The beauty of LD 1088, the senator from Cornville said, is that it is pro-business — something Republicans should like — while lowering taxes for Maine families — something Democrats should like. The Bangor and Portland Chambers of Commerce support the measure.

Under LD 1088, the state’s top income tax rate will be reduced from 8.5 percent to 6.5 percent. Since the top tax rate kicks in for a single filer with $17,350 in annual taxable income, the tax break will help most residents. Most businesses in Maine are partnerships or S-corporations and file as indi-vidual income tax payers, so the discounted rate will apply to them as well.

Maine sales tax applies to the fewest items of nearly any state in the country, creating a very volatile system. New cars and building supplies account for nearly a third of the state’s sales tax collections. Both fall rapidly during bad economic times.

Extending sales tax to more items and services, such as ski lift tickets, dry cleaning and auto repairs, will mean that Mainers will pay a bit more in sales tax. But that is more than offset by decreasing the state’s income tax rate and the credits contained in the bill.

To remain revenue-neutral, in addition to a broader sales tax base, LD 1080 would increase the meals and lodging tax from 7 percent to 8.5 percent and increase the real estate transfer tax on homes that sell for more than $500,000. Both taxes will be borne in large part by out-of-state residents.

Reforming taxes in a way that benefits residents and provides a more predictable revenue stream is long overdue.